The Case of the Missing First-Time Buyer

This month's cut in the Bank of England base interest rate, the second in three months, is good news for first-time home buyers, who have seen prices soaring out of their reach as the cost of mortgages has edged inexorably upwards. Latest figures from the Department for Communities and Local Government show that the number of people who own their home has tumbled to the lowest level since Labour came to power, and is now below 70%.

The number of home-owners in England dropped by nearly 100,000 last year to 14.5 million, or 69.8% of total households. At the same time the number of first-time buyers entering the market is the lowest since 1980, according to the fifth annual Halifax First-time Buyer Review, published at the end of last year. In 2007 just 300,000 first-time buyers entered the market - 44% fewer than 2002's figure of 532,000.

The property website Rightmove.co.uk found that nearly a quarter (22%) of first-time buyers are now aged over 35, while 36% of would-be first-time buyers were still living with their parents as they tried to save enough money for a deposit.

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The fall in interest rates is certainly good news for cash-strapped mortgage borrowers, but are the interest cuts too little too late?

The Royal Institution of Chartered Surveyors thinks more cuts may be needed to help hapless homebuyers. Simon Rubinsohn, RICS chief economist, said, "It is significant that December's interest rate cut has had little impact on consumers' wallets. Lending standards are continuing to tighten, with both the lowering of loan-to-value ratios and the changing terms for credit cards adding to the bad news for beleaguered borrowers.

"While a reduction of £32 on a typical mortgage may offer some comfort, should the rate cut be passed on in full, rising costs elsewhere are likely to offset any benefit."

First-time buyer affordability down sharply

The Halifax figures make gloomy reading. Its survey found that the average price paid by a first-time buyer had increased by 15% in 2007 to £175,093, up 82% from £95,994 in 2002. The hike means that the average house is now unaffordable for first-time buyers in 466 out of the 483 towns surveyed.

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Buyers at the bottom end are forced to turn to flats, and for the first time the proportion of first-time buyers purchasing a flat in 2007 (37%) was the same as that buying a terraced property - traditionally the least expensive property type - in 71% of towns across the UK (322 out of 454). In 2002, the typical first-time buyer could not afford to purchase a terrace in only 11% of towns across the UK (51 towns).

An even more depressing statistic for first-time buyers is that in eight out of 12 UK regions first-time buyers had to pay stamp duty land tax . This is despite the Government's pledge to help first-time buyers. The tax is charged at 1% of the full purchase price of homes costing between £125,000 and £250,000, rising in tiers thereafter.

The starting point for stamp duty, which until 2000 was just £60,000, was raised first to £120,000 and then the current level in 2006, but has failed to keep pace with house price inflation by a country mile.

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Unfortunately there is no easy answer to the problem of young people not being able to afford a mortgage to buy their own homes - although the narrowing gap between annual house price inflation and increases in average earnings may eventually ease the problem.

So, what can be done in the meantime?

The problem is that the cost of getting on the housing ladder is driven by many factors. The obvious one is a shortage of housing stock, but there are many others, which means that simply concreting over the green belt and putting up "affordable homes" is not the answer.

The shortage of homes is driven as much by social trends and personal choices as anything else. Young adults, who would have remained with their parents until they got married - and sometimes afterwards - now want their own home while they are still single. The elderly, unsurprisingly, wish to remain in their homes as long as possible - and they are living longer, so less housing stock is being released.

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11 February 2008 © Moneyextra.com

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